First Financial Bancorp.

Good day and welcome to the First Financial Second Quarter 2020 Earnings Conference Call-In Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Scott Crowley, Corporate Controller. Please go ahead.

Thanks, Alyssa. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bank Corp's second quarter and year-to-date 2020 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slide contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the second quarter 2020 earnings release, as well as our SEC filings, for a full discussion of the company's risk factors. Information we will provide today is accurate as of June 30, 2020, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I now turn the call over to R.G. Brown. Thank you, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the second quarter. We're very pleased with our performance, especially when considering the unique circumstances in which we were operating related to COVID-19. Consistent with the broader industry, our results continue to be substantially influenced by the pandemic across net interest income, key income, and most significantly, provision expense. Our second quarter performance demonstrated continued strength and resilience in our businesses despite the challenging backdrop and marked our 119th consecutive quarter of profitability. Highlights included adjusted earnings of $0.40 per share, a 1% return on average assets, a 13.47% return on average tangible common equity, and a 50% efficiency ratio when adjusted to remove non-occurring items. Second quarter was our highest core fee income quarter on record. Our mortgage division had a sensational quarter as the hard work of our team combined with historic low interest rates to drive an almost 500% increase in mortgage banking revenue to $16.7 million. Core banking trends for loans and deposits were significantly influenced by the Paycheck Protection Program. During the quarter, we secured SBA approval $113 million. Additionally, increased liquidity in the financial system across both businesses and consumer client segments contributed to the strong deposit growth. Our banking teams are seeing a return to sales momentum across many of our business lines. The mortgage team continues to see a very high volume of refinances and purchases with rates at an all-time low. Sales activity also has been strong for checking growth, consumer loan originations, and wealth. All teams are embracing the virtual remote solutions leveraged to a greater degree during the height of the COVID pandemic. These are all encouraging signs of how our new normal is no longer restraining activity. Expenses were lower in the quarter as we limited discretionary spending and implemented additional hiring controls. Credit trends remain stable. However, forecasted credit deterioration over the latter part of the year drove elevated provision levels in the quarter. We are pleased and appreciative of the incredible work of our associates during the quarter. As can be seen on slide 19, our guiding principles in managing this crisis continue to be prioritizing associated client safety, preserving the continuity of our business, assisting our communities, and ensuring the safety and soundness of our company. Over the last several months, we successfully implemented our pandemic management plan with more than 50% of our associates working remotely and our branches operating with closed lobbies for most of the quarter. We promptly reviewed our client service model and shifted to utilizing technology in new and innovative ways. Our associates went above and beyond to provide essential services and assist customers at critical moments. Our teams work evenings and weekends processing and funding $913 million in PPP loans, customer deferrals totaling over $2 billion in loan balances, and historic levels of fee waivers in mortgage applications. At this time, over 60% of our Banking Center lobbies are fully open, with the remainder servicing clients by appointment. Physical staffing levels in our office buildings is currently limited to 25% of normal capacity, mostly on a volunteer basis, with the remainder of the staff continuing to work remotely. We continually monitor conditions in our markets and banking centers, in addition to guidance provided by local and state governments with regard to safely returning to the workplace and opening our branch locations to customers. Overall, I continue to be extremely pleased with our ability to quickly adapt to the challenging environment and function at a high level. I'll now turn the call over to Jamie to discuss the details of our second quarter results. And then after Jamie's discussion, I'll wrap up with some comments on the specific areas of focus within our loan portfolio and provide some forward-looking commentary. Jamie. Thank you, R.T., and good morning, everyone.

Slides four and five provide a summary of our second quarter 2020 performance. Overall, we were pleased with second quarter results. as the company's operating performance remained solid with elevated fee income and an efficiency ratio that surpassed our expectations. Although we were encouraged by our relative performance, the pandemic continued to produce meaningful headwinds. Despite stable credit metrics, we recorded $20.2 million of provision expense during the quarter, and we believe our current reserve positions us to effectively manage credit deterioration in the back half of the year. Our capital remains strong and regulatory ratios remain in excess of both internal and regulatory targets. We believe that our balance sheet is well positioned and our core fundamentals should allow us to maintain these levels for the foreseeable future. As expected, our net interest margin declined 33 basis points on an FTE basis compared to the prior quarter. as asset yields were negatively impacted by lower interest rates. However, we were able to partially offset the impact by prudently managing funding costs. Fee income was the highlight of the quarter and one of the main drivers of our financial results. Mortgage banking was particularly strong, increasing $13.8 million compared to the first quarter, while foreign exchange, wealth management, and client derivative income were in line with our expectations. This elevated fee income, along with a relatively flat expense base, resulted in another quarter with a sub-60% efficiency ratio. We also believe we are well positioned from a regulatory capital standpoint, as both total and Tier 1 capital ratios improved on a linked quarter basis. Total capital increased 159 basis points, bolstered by the $150 million sub-debt issuance at the beginning of the quarter. Additionally, our tangible common equity ratio declined 16 basis points in the second quarter. However, the increase in assets due to PPP loans accounted for 53 basis points of deterioration. And absent this impact, TCE expanded 37 basis points during the period to 8.62%. Slide six reconciles our gap earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $39 million or 40 cents per share for the quarter, which excludes 700,000 of COVID-19 related costs and $1.5 million of other non-recurring items, such as branch consolidation costs. As shown on slide seven, These adjusted earnings equate to a return on average assets of 1% and a return on average tangible common equity of 13.5%. Our 56.1% adjusted efficiency ratio remains strong and reflects our diligent approach to expense management. Turning to slides 8 and 9, net interest margin on a fully tax-equivalent basis was 3.44% for the second quarter. The 33 basis point decline was primarily related to lower asset yields, which were impacted by the full quarter of lower interest rates and the normalization of LIBOR. Asset yields and mix negatively impacted the net interest margin by 57 basis points during the quarter due to the lower rates. This was partially offset by lower funding costs, which positively impacted the margin by 26 basis points during the quarter. In addition, it's worth noting that our participation in the Paycheck Protection Program resulted in three basis points of margin dilution during the period. The impact of the recent Fed actions are further shown on slide 9, as declining interest rates caused the yield on loans to decline by 79 basis points, while the investment yield dropped seven basis points due to lower reinvestment rates. In response to these declining yields, we aggressively lowered our cost of deposits 24 basis points during the quarter. Slide 10 depicts our current loan mix and balance changes compared to the linked quarter. End of period loan balances increased $874 million, which was primarily driven by PPP loans. The remainder of the portfolio was relatively unchanged from the first quarter. Archie will provide further commentary regarding particular areas of focus in the loan portfolio later in the presentation. Slide 11 shows the mix of our deposit base, as well as a progression of average deposits from the linked quarter. In total, average deposit balances grew $1.5 billion during the second quarter, driven by large increases in non-interest-bearing deposits and brokered CDs. All other categories of deposits grew as well, with the exception of higher-cost retail CDs. We attribute the majority of our deposit growth to customers retaining stimulus checks and PPP funding, as well as an increase in the consumer savings rate. As I previously mentioned, we were encouraged with our ability to successfully manage deposit costs, resulting in a 24 basis point reduction to 40 basis points. We will continue to monitor deposit pricing over the coming months and make any necessary adjustments based on market conditions and our funding needs. Slide 12 highlights our non-interest income for the quarter. Second quarter fee income was our highest since 2011 and was driven by a significant increase in mortgage banking income, while foreign exchange income, wealth management fees, and client derivative incomes all met or surpassed internal expectations. Non-interest expense for the quarter is shown on slide 13. Overall, expenses were relatively flat compared to the first quarter and were in line with our expectations. Non-interest expenses included $700,000 of COVID-19 related costs and approximately $1.5 million of other costs not expected to recur, such as branch consolidation costs. In addition, we incurred $800,000 of incremental expenses related to the Paycheck Protection Program during the quarter. Next, I'll turn your attention to slide 14, which discusses our allowance for credit losses and related provision expense for the quarter. Our second quarter model resulted in total ACL, which includes both funded and unfunded reserves of $175 million, and $20 million in total provision for credit losses. The model utilized the Moody's baseline economic forecast released at the end of June. Similar to the first quarter, it's worth noting that the majority of provision expense related to the expected economic impact from COVID-19. As shown on slide 15, credit metrics were once again fairly benign, as we had $3.1 million of net charge-off for the period and relatively flat non-performing and classified asset levels. Net charge-offs were 12 basis points as a percentage of loans, which is relatively in line with recent historic levels, despite the slight increase compared to the first quarter when we had net recoveries. While our credit metrics don't reflect much stress at the current time, we do expect some deterioration in the back half of the year, as deferrals expire and we continue to manage the pandemic. As such, we believe our current reserve levels adequately position the balance sheet based on the current economic models. Finally, as shown on slides 16 and 17, capital ratios remain strong and are in excess of regulatory minimums. Total and Tier 1 capital ratios each increase during the second quarter and all ratios continue to exceed internal targets. Our tangible common equity ratio declined by 16 basis points during the period. However, as I previously mentioned, this was driven by 53 basis points of dilution from PPP loans in the denominator. We do not foresee any near-term changes to the common dividend. However, we will continue to evaluate various capital actions as the economic impact of the COVID pandemic develops. I'll now turn it back over to Archie for commentary related to particular areas of focus and our outlook in light of the current operating environment. Archie.

Thank you, Jamie. Given the continued economic circumstances related to COVID-19, we've updated slides 21 through 25 to highlight specific areas of focus within our loan portfolio. As mentioned earlier, slide 22 highlights our in the PPP. At this point, the program remains available to customers, but recent demand is low. We are awaiting final guidance from the FDA before proceeding with launching our forgiveness efforts. Our first round of payment deferrals is expiring, and most will occur in July and August. Slide 23 depicts our franchise portfolio, of which we have $296 million, or 64%, that secured round one 90-day payment deferrals. $157 million of these deferrals have returned to making full principal and interest payments, and another $84 million have been granted a second deferral. As discussed last quarter, the primary area of stress within this portfolio is expected to be in the sit-down restaurant category. As can be seen on slide 24, our hotel portfolio will likely require additional payment relief given continued low occupancy rates. $370 million, or 90% of the portfolio, secured initial 90-day payment deferrals, and we expect the majority of these deferrals to be extended. Last now on slide 25, $507 million, or 61% of our retail ICRE portfolio, secured round one deferrals, but it's too early to evaluate how many will need a second round. Given the uncertain operating environment, we're continuing with a more limited forward-looking guidance this quarter. Slide 26 shows the key factors that we expect to impact our performance moving forward. Loan growth is expected to be in the low single digits, excluding the transitory impact of the PPP program. Core deposits are expected to remain elevated in the near term, and gradually decline with the eventual spending of PPP and stimulus dollars and outflows of additional customer liquidity. The net interest margin is expected to be positively impacted by the timing of PPP forgiveness payoffs and the associated accelerated fee recognition. We expect some modest pressure going forward, excluding PPP impacts, as the full impact of the lower rate environment is realized and purchase accounting declines. Current economic conditions and expectations over the near term indicate higher credit losses for the back of 2020, back half of 2020. Therefore, we expect continued elevated provision expense when compared to historical levels. Regarding fee income, we expect continued strong mortgage refinance activity over the next quarter though at a more normalized valuation level than we saw in the second quarter, and gradual declines in volume later in the year. We also expect foreign exchange income to rebound in the near term as overall business activity improves. We anticipate deposit overdrafts, service charge, and interchange revenues to slowly return as consumer and business spending returns to pre-pandemic levels. With respect to expenses, We expect a gradual increase as business activities increase. We follow a disciplined approach to expense management and have paused on most planned hiring, discretionary expenditures, and significant investments, except where critical. Additionally, during the quarter, we closed four branch locations, bringing to a total of 58 closures over the last two years for almost 30% of our network. In light of accelerated changes in customer behavior, observed during the pandemic, we continue to evaluate our distribution channel. Regarding the PPP, as mentioned earlier, we originated approximately $913 million in PPP loans during the second quarter with an average fee of 3.3%. We expect forgiveness payoffs to begin in the third quarter and be concentrated in the fourth quarter and early 2021. The second quarter was historic and challenging, but also highlighted newfound capabilities which we can build upon moving forward. We will continue to leverage technology and reevaluate our distribution model to better serve the needs of our customers. The broader economic environment remains uncertain, and our clients continue to face serious challenges. We are committed to be a stabilizing presence in our communities and remain steadfast in our promise to manage the company in a manner that prioritizes the physical and financial well-being of our associates and clients while delivering long-term value to our shareholders. This concludes the prepared comments for the call. We'll now open up the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question today comes from Scott Cypress of Piper Sandler. Please go ahead.

Good morning, guys. Thanks for taking the time. Hey, I wanted to ask on the credit cost expectation for the back half of the year. I'm just curious how you're thinking about the outlook for further reserve build and what will drive things from this point? Will it be charge-offs or is there just still enough uncertainty that you would expect to continue to build up the reserve at least or, you know, sort of top it off a bit? What are the main drivers there?

Yeah. Hey, Scott. It's Jamie. So I think – so to clarify one thing, I mean, when we say in the outlook that the back half of the year is going to have elevated provision expense. We're really, I mean, A, first of all, there's a lot of uncertainty, but B, when we're saying that, we're saying that it's elevated credit costs relative to and compared to historical levels. So, you know, we put $25 million in the first quarter, $20 million here in the second quarter. We expect that to still be elevated, whether that's at $20 million or lower. I mean, it's going to depend on a lot of factors. It's going to depend on, you know, when these loans start to come out of their deferral period, you know, the uncertainty there of what's going to happen as we start to see charge-offs emerge from the – you know, in the back half of the year, what that looks like, the severity of those, the default rates, and then really just what the overall economic forecast is going to look like, you know, in terms of the pandemic and in terms of the economic recovery. So a lot of factors, but, you know, right now based on the the economic models that we are looking at. We still think that it's going to be somewhat elevated, but, again, that's compared to historical levels.

Perfect. All right. Thank you. Appreciate that. And just as you think about mortgage remaining elevated, I mean, it was, I think, so far – Out of the range that I figured I would have thought. Elevated, you know, if you had asked me 24 hours ago, I would have said elevated was, you know, maybe a third of what you guys actually printed. Just curious sort of how sustainable. I know it will moderate, but just given the amount of error between yesterday or last night's print and what a typical elevation looks like, I'm curious to hear your thoughts.

Yes. Yeah, we do think that mortgage banking income will be elevated. Now, we do think it's going to come down, though. And if you look at the second quarter, the gain on sale premium overall in total was extremely high for us. So we think that comes down. So we think production levels stay relatively the same. second quarter to third quarter, that gain percentage, so what we'll realize on the back side, we think comes down, and we think that comes down by about 20% or 25%. So, you know, we got a – it was just extremely high. The market was kind of perfect for – you know, the mortgage banking division in the second quarter. So it'll come down a little bit, but production levels, given where rates are, will still remain high.

Terrific. All right. Thank you guys very much.

The next question comes from Chris McGrady of KBW. Please go ahead.

Hey, good morning. Jamie, maybe going to your expense comments, pleasantly surprised that you kept expenses down despite the mortgage. Wondering how you're thinking about the expense climb that you allude to going forward. And also, you know, I think you talked about how you outperformed your efficiency targets. I'm interested how you think the bank can operate a reasonable range given where we are with rates.

Thanks. Yeah. Yeah, I mean, obviously, just maybe I'll tackle the second one first on the efficiency ratio. I mean, that's not really something that we to, per se, but, I mean, especially given the pressure that we have on the net interest margin, that's obviously going to play into the efficiency ratio. But, I mean, our goal is to, you know, manage expenses as best as we can. You know, when we look at, you know, when we look at second quarter going forward, I with things being shut down, with activity just being low in terms of employees being able to travel and whatnot, that we had some natural decline there in the expense base. So we expect that to come back a little bit in terms of a few of those categories, in terms of T&E expense and some getting back to what I would call kind of normal marketing expenses, and trying to actually, you know, trying to grow the business now as opposed to, you know, this, you know, kind of being more internally focused and things being shut down. So we will see kind of just this, I would say it's a kind of a normal back to normal business type of expense increase and getting back to, you know, investing in some of these projects that we have in the pipelines.

Okay, great. Thank you for that. Maybe one more on the balance sheet. What are the expectations? I think you talked about deposits to be elevated. I'm just trying to forecast out kind of core net interest income given the balance sheet size and the pressures on the margin. Any thoughts on that, maybe irrespective of the PPP?

Yeah, so in terms of – I guess I want to make sure I understand your question. You're talking about what we're – what we are forecasting and what we're thinking deposit balances are going to do for the rest of the year?

Yeah, I guess I'm trying to back into what core net interest income trends are going to be over the next couple of weeks.

Yeah. I mean, in terms of the balance sheet, I mean, we do think that deposit balances will, you know, will bleed down. You know, the big question mark is how fast the – deposit balances related to some of the government stimulus to PPP to, you know, just overall consumers, how fast that will bleed down through the back half of the year. So we do expect that to be the case. It's just it's unclear right now how the – because we are carrying a little bit of excess liquidity on the balance sheet at this point, which we are, you know, so you could say we aren't quite as, you know, NIM efficient, I guess, as we could be. In terms of the NEM, I mean, the core NEM, I mean, we will see pressure on the NEM here going forward just with the absolute level of rates being lower. You know, when you look at the second quarter, the second quarter would still have been a little bit elevated just because if you look at April, we still had LIBOR was a little bit elevated compared to where it is now for that first part of the quarter. So... You know, that has come down now, and we will get the full quarter effect of that in the third quarter. So we'll see a little bit more pressure in the third quarter. And then, you know, as – and then it will really kind of stabilize to maybe just have slight pressure going forward because, you know, the asset yields will stabilize, and we're seeing deposit costs moving down. fairly rapidly in the third and fourth quarter, and then kind of as CDs. Then it's really just kind of CD roll-off after that. So, I mean, we think after that's all said and done, the core NIM stabilizes somewhere between 335 and 340.

And, Chris, this is Archie. A couple of other points on deposits. One is, I mean, the majority of VP dollars are still sitting in accounts, plus you have just consumers and businesses... keeping more cash on hand, some of that from stimulus, and just spending less until activity levels are lower, and just being conservative. I think another variable will be certainly if activity slows in the economy and people continue to keep balances up, and then it looks like there's going to be another round of stimulus, and if another round of stimulus checks come, then how that happens.

That's great. Jamie, I just want to make sure I'm clear on the margin. So you said 335, 340. That's excluding PPP, but does that include accretion?

It does include accretion, yes. But it would take out any bumps that we would see for PPP forgiveness or anything like that, yes. Okay. Okay. Yeah, because that's – I mean, you know, we expect that to come in, you know, in the back half of the year, the fourth quarter, and into the first quarter, you know, where the margin will get that pop from that, right? Yep, got it. Okay, perfect. Thank you.

Again, if you have a question, please press star, then 1. The next question comes from John Armstrong of RBC Capital Markets. Please go ahead.

Thanks. Good morning.

Hey, John.

Hey, John. Hey, a couple of follow-ups, but I guess maybe start with this one. On loan growth, on your guidance, you've talked about both single digits excluding PPP. And just curious, Archie, the drivers of that and what you're seeing, and I guess, you know, maybe the question is, you know, what does slide 10 look like a quarter from now, which, you know, shows your loan growth categories?

Yeah, John. So we're showing kind of, as you said, a low single-digit annualized growth for kind of near-term. And it's really a little more broad-based. If you look at the last few quarters, it's probably been, actually probably the last few years, it's probably been a little more tilted towards ICRE. Our forecasts are starting to show a little slower growth there, but We actually had some nice fundings that we thought might hit at the end of Q2 that actually hit in the first part of Q3. And it looks like it's just a little more even across the commercial categories in addition to ICRE. The consumer side, a little bit more depressed, mainly because, you know, mortgage actually is so strong. The refinance volume is – we'll pay off some of the mortgage side. But it's really across the commercial categories and a little less by series.

Okay. Purchase market trends. I know you've talked about refinance, but, you know, curious on purchase market trends. And then you've talked about this service charges kind of starting to return to pre-pandemic levels or activities starting to return to pre-pandemic levels. Just curious about overall consumer health from your point of view. Yeah.

on the mortgage side, on the purchase side, it's very strong. Refinance, though, was with the majority. It certainly was more than, I think, maybe closer to two-thirds, Jamie, for the period. But the purchase activity is strong. I think the issue we're seeing in our markets is there's low existing home inventory. So we are seeing in the market, for example, the construction side, the The builders in our markets are doing extremely well. There's just not that many existing houses to buy. So it's strong. It's just that makes it a little bit more challenging on the purchase side. On the consumer side, we're seeing great production, but we're also seeing payoff pressure primarily due to the refinance market. So I think we had our highest production period in consumer loans for the second quarter. but we didn't realize the growth from it just because of the payout side, because of refinance on mortgage. Service charges, you know, what we've seen so far, John, is on the consumer side, things are starting to pick up. I mean, you can even look at, like, interchange. Interchange on the consumer side is pretty close, almost back, but on the business side, it continues to be a little bit depressed. We expect that to start coming back as business activity increases. Overdrafts, service charge fees, we had a lot of waiver programs in place during the quarter. Some of those are still in place, but we think that will, plus we have these excessive amounts of checking account balances that consumers have. So as that spins, as things improve,

Helpful. That helps. It's just I wanted a couple follow-ups on credit as well. I understand what you're saying. It's difficult to project the provision, but you're clearly flagging some increased charge-offs coming in the second half of the year, and it's not surprising. But is the message on the provision you have enough in reserves provision essentially matches charge-offs? Is that the big picture message?

Yeah, I mean, still, I mean, obviously, John, a lot of uncertainty in that and a lot of things could move around. But for the time being, given, you know, unless the economic forecast that we input into the model would change dramatically, that's correct, exactly what you're saying.

I think I heard about, what, 170? Yeah. In terms of coverage to loans, which is probably on the higher side for what we're seeing in the industry, especially among peers. So well, but there's just a lot of uncertainty about the virus and where things go. We know it's not going to get back to probably pre-COVID levels in the near term.

Sources of the charge-offs? Is it just the obvious categories of stress?

John, this is our jail start. Maybe we could help Bill Harry give a little color, but during the quarter, charge-offs were pretty benign, but interestingly enough, the there were probably three credits that drove the primary amount of our chart costs, and none of them were really in what we would call the sensitive portfolios, and all of them were already in a – we already had them more of a classified loan level or classified loans prior to COVID. So these were credits that were already on our radar. They were already in a weakened state coming into the pandemic period.

Yeah, we highlight the various portfolios that we deem to be the higher risk portfolios, and those are the ones we're monitoring very, very closely, of course, as well as the rest of the book. And we're actually starting to enter into our referral expiries, as Archie mentioned earlier, from the first round of deferrals. So as we work our way into the second round of deferrals, you know, some will need it, some will not need it. And that's really going to help us understand where our charge-offs might be coming from. You know, right now it's really early to make a real definitive call on where we think they're going to come from. because, you know, we just haven't kind of worked through that second round and gathered all the information that we need to really protect. But, you know, as we look at the highest impact from COVID, you know, be it a sit-down restaurant, you know, hotels, and things of that nature, you know, I do think those are going to be more longer-term solutions and then through the course of those long-term solutions, depending on how long the COVID impact lasts, those are where you'll see the fallout.

Right. That's helpful. Thanks a lot, guys.

The next question comes from David Long of Raymond James. Please go ahead.

Good morning, guys. Good morning. I just wanted to drill down a little bit on the hotel portfolio. I appreciate the color that you guys gave. Have your customers, have they given you any occupancy data? Can you talk a little bit about what they're seeing on the occupancy side relative to where we were pre-pandemic?

Yeah, and this is Bill here. And as we look at the portfolio data, Since COVID hit, we've been monitoring this really on a monthly basis. And we saw it go down. This is very macro, going across the portfolio. And, you know, even down into the 5%, 10% or less range of occupancy as things were pretty much shut down. What we are seeing over the course of May and June, we started to see some of that come back. into the 20s, and even into the low 30s. And we have some outliers on either side. And so we are starting to see that really improve, but it is still the bulk of our portfolio is skeleton crews, demands with the lower occupancy, and starting to really start. What we like is the increase in kind of getting into the 30s, In 40s, obviously, as we get into the 50s and 60s, we feel a lot better, but we're starting to see it in the 30s.

Got it. Okay. And in the slide, you mentioned the loan-to-value at 63% being pre-pandemic. Have you done any updated appraisals, or have you seen any sales in the marketplace?

I've not seen any sales in the marketplace at this point. and we have not done reappraisals at this point. When we look at the value of a hotel, you know, it's short-sighted to look at it very tight right now. And so what we're working with are some of our outside partners as well as our sponsors on the book is starting to see when they think things are really going to start to turn, and that's what we're really focused on. which could be early next, early next year.

Sure. Okay. And then, and then finally, you know, when you're thinking about the deferrals and some of these maybe had 90 days or 180 day deferrals, I guess it sounds like most of them were 90 days. I'm assuming those will go to 180 days. And then, so that's my first part of my question. But the second part is after 180 days, then what happens? Sure. Um,

We are – the next round of furloughs is another 90-day increment. We really structured our program based on two 90-days to see where that sets us opposite the spread and the stabilization of the pandemic. And phase one was really focused on an outreach program, making sure that we got to all of our customers and we dealt with them appropriate and gave them relief as this is all coming down. The second round, you know, what we're doing is it's a little more analytical, obviously more forward-looking, as well as understanding the relationship with the owner, the sponsor, and all the stakeholders on the deal. And so that's what we're going through right now. And what we're seeing is – A hybrid, and this is, we have very limited data just on the, as we work through them, we're very small into our portfolio, very limited in our portfolio. But what we're doing is we're looking at, if you're on full payment deferral before, looking at both interest-only options and full payment deferral depending on the situation. And then what we're then looking forward to is after they need a third round, it's really going to be, you know, focused on the type of industry it's in, what the prognosis for the industry looks in, and then building a structure, what that makes sense to accommodate us bridging to stabilization. What we're not going to do is, you know, defer a third round if we think that there's a better outcome or a better business case or something else, but we will look at the situation with the stakeholders and do a potentially longer round. We haven't come up with exactly what those products are going to be, but the plan is to get stakeholder alignment between the bank and the owner, et cetera, such that we have a nice roadmap to a kind of restabilization on those longer hit industries. and we think it is in things like hotels. Yeah, for example, hotels would be probably a really good example where if they're not coming back, let's say it's a little bit longer into the year or early next year, there could potentially be an interest-only period in the restabilization just like you would on a normal construction of a hotel.

Okay. And how do you anticipate the accounting for those loans? Does that make them, does that put them on, you know, an accrual status or restructured? And how does that impact the risk rating? Or I should say the capital they have to hold.

Yeah, this is Archie. We know the six months, we know that we're good there. We've seen guidance on that already. I think there's some additional interagency guidance and discussion coming. for what would happen beyond this. So we're eagerly watching that, talking to our regulators and our accountants about it. So I can't tell you that we know exactly now. I mean, based on the current guidance, if it goes beyond that and beyond this year, we probably would have to look at that more as a troubled debt restructure. But we, again, think there are certain portfolios and industries where, as Bill said, there's probably a stabilization plan that some of those industries may need, and we will have those conversations with regulators and accountants and ultimately decide, you know, what we need to do.

Yeah, and I'd like to real quick just, you know, as we look at our portfolios and I talk about kind of the after round two, based on our portfolio reviews that we've completed and continue to complete, our expectation is that third round, if there is one, it can be very limited and targeted to, like, for example, a hotel portfolio or maybe a sit-down chain restaurant. The bulk of our other deferrals, be it delivery, quick serve, those are, round twos are going probably mostly to interest-only. and then there won't be a round three. We don't expect. And then our commercial and business banking, you know, our portfolio reviews, we expect those to kind of come off and not need a round three.

I know the situation is fluid, so I do appreciate the color here at this point. So thank you.

Thanks, David.

The next question is a follow-up from Chris McGrady from KBW. Please go ahead.

Oh, great. Thanks. Jamie, just wanted to ask about the tax rate. Sorry about that.

Yeah. Sorry. Let me grab this here real quick. So when you look at the tax rate for the second quarter, We think that's going to be fairly consistent going forward, and around that, our effective tax rate for the second quarter was just under 18%, and we think that's fairly consistent here for the next couple of quarters. Now, I guess the wild card would be then how much provision expense we have, and that could move it around a little bit, but We do have some timing of tax credits that can move that around too, but if you use 18%, you're in the ballpark.

Great. This concludes our question and answer session. I would like to turn the conference back over to Archie Brown for any closing remarks.

Thank you, Alyssa. Thank you all for joining or calling through your interest today. We Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.